Oct. 24 (Bloomberg) -- Poland’s government, re-elected this
month, will probably take steps to prevent the country’s debt
from breaching a legal limit and the country may be upgraded if
it takes growth-spurring measures, Standard & Poor’s said.

Prime Minister Donald Tusk, the first incumbent government
leader to win an election since the collapse of communism 22
years ago, needs to keep public debt, at 52.8 percent of gross
domestic product last year according to national accounting
standards, from breaching a 55 percent ceiling that would
trigger mandatory austerity measures.

“The government will likely take measures to prevent debt
from breaching” the 55 percent limit, S&P analyst Leila Butt
said in a telephone interview today. “If the government took
steps to improve competitiveness, which would raise production
and help speed up growth, while halting and eventually reducing
debt levels, we could take positive action on the rating.”

The government is struggling to bring the deficit under
control after it reached 7.9 percent of GDP last year. Finance
Minister Jacek Rostowski has reiterated Poland will succeed in
narrowing the shortfall to within the European Union limit of 3
percent of gross domestic product in 2012.

‘Not Credible’

Next year’s budget is based on “unrealistic” assumptions
and the fiscal consolidation plan is “not credible,” which may
result in a credit-rating downgrade unless the government takes
measures to narrow the deficit, central bank policy maker Zyta
Gilowska, a former finance minister in the cabinet of Tusk’s
rival Jaroslaw Kaczynski, said in an Oct. 11 interview.

“We expect some slight fiscal slippage unless the
government takes measures beyond what it has currently
outlined,” Butt said. “Negative action is possible if the
government has more slippage on the fiscal position than we’re
expecting.”

The zloty strengthened to 4.3754 against the euro as of
3:16 p.m. in Warsaw from 4.3923 on Oct. 21 The yield on Poland’s
10-year bond maturing in October 2021 rose to 5.787 percent from
5.766 percent on Oct. 21.

Meeting the target will require Tusk to amend measures
already announced, including a public-sector wage freeze and
plans to cut pension privileges for professions including the
police and army, Butt said.

‘Positive Steps’

“The government is taking positive steps by saying it will
tackle the uniformed pensions and raise the retirement age,”
Butt said. “But high levels of mandatory expenditure make it
more difficult to put public finances on a sustainable track.”

The zloty has gained 1 percent against the euro this month.
Polish government debt maturing in more than 10 years returned
6.6 percent in dollar terms in the past month, the best
performance among 174 indexes compiled by Bloomberg and the
European Federation of Financial Analysts Societies.

S&P has an A- rating on Polish debt, three notches below
neighboring Czech Republic and three steps above Hungary.
Moody’s Investors Service said after the Oct. 9 election that
Poland’s rating outlook may come under pressure unless the
government presents “contingency plans” to cut the budget gap.
Moody’s rates Poland A2, the sixth-highest investment grade.

EU Summit

European leaders yesterday outlined plans to aid banks, cut
Greece’s debt without triggering a default and shield Italy and
Spain from further turmoil, while ruling out tapping the
European Central Bank’s balance sheet to boost the region’s
rescue fund yesterday in their 13th crisis-management summit in
21 months. The complete blueprint won’t come together until the
next summit on Oct. 26.

Tackling Poland’s public finances will be the greatest
challenge for Tusk as he prepares to take office for a second
term, according to Jan Amrit Poser, chief economist at Bank
Sarasin.

Poland, the EU’s largest eastern country, was the only
member of the 27-nation bloc to avoid a recession at the height
of the global crisis in 2009. The economy grew an annual 4.3
percent in the second quarter, compared with 1.5 percent in
Hungary and 2.2 percent in the Czech Republic.

Slowing economic growth and the euro region’s debt crisis
may derail the plan unless the government takes “more drastic”
measures, Fitch Ratings said on Oct. 10.

GDP has the potential to rise in the coming years with
Poland’s internal market of 38 million consumers buffering the
economy from dwindling external demand as the euro area battles
its sovereign-debt crisis, S&P’s Butt said, estimating the
expansion rate between 3 percent and 3.5 percent next year,
depending on the performance of the euro region.

“The country has a solid growth potential in the short- to
medium-term,” she said. “It’s less export dependent than other
countries in the region and can rely on its domestic market to
drive growth.”